Land is an essential factor of production for socio-economic and sustainable development. Land fragmentation is the practice of farming a number of spatially separated parcels owned by small holders. Agricultural land fragmentation evolved over centuries in highland areas of the country. Diminution of farm and parcellization of parcels are common under all tenure systems and in every part of the country. The specific objectives of the study were to examine the nature and cause of land fragmentation, to assess the impact of fragmentation of farm land on the productivity and household income of smallholder farmers, to assess the causes and driving force of land fragmentation and also to estimate the minimum average farmland holding size per household that can support subsistence level. The study made use of secondary and primary data sources. In primary data collection structured questionnaire and focus group discussion were employed. Three kebeles were randomly selected in the first stage and 166 sample households‟ heads were systematically selected. To analyze the effect of fragmentation on productivity and farm income and also to estimate minimum farm land size a multiple linear regression and Cobb-Douglass production function econometric model were used respectively. According to the result of the study average family size is 2.8 adult equivalents with average farmland holding of 1.43 hectares. Average farmland holding is formed from 4.38 parcels scattered over areas. Agricultural land fragmentation parameters, average distance of parcels, oxen power intensity, age of the household, operating capital intensity, number of parcels holding and average size of parcels are not highly significant to influence land productivity. But labor power used intensity is the only variable highly significant to affect the productivity of land. Whereas oxen power intensity, operating capital and age of the household head is negatively affect land productivity, which is against the theory. A farm land size of 0.756 hectare is estimated as a minimum size that can generate minimum food and cash requirement of an average farm family of 2.8 adult equivalents. Variables that are significantly affect net farm income are oxen power used, area of cultivated land area and operating capital.. Land fragmentation has beneficial effects in reducing risks through the spatial diversification of activities and to have access to different types of land. The advantage of land fragmentation should not be overlooked if an attempt to reverse its problems is to be pursued. Female headed households generated lesser net farm income than male headed households, because they had lesser access to some of the factors of production. To overcome the above mentioned problem; the government should focus on to improve farm land productivity by supplying proper farming system, supplying agricultural inputs, find ways to promote off-farm and non-farm employment opportunities. Key terms: Cobb-Douglass Production Function, Econometric Model, Land Fragmentation and Minimum Farm Size.